That’s a bullish cycle. It shows the way human nature acts in the financial markets.

It comprises both fear and greed. Moreover, panic and complacency.

In short, five waves up corrected with three waves down. That’s a bullish cycle with the Elliott Wave Theory.

Obviously, the opposite makes a bearish cycle: five waves down, corrected with three waves up.

That’s the pillar of this theory. Any Elliott wave trader knows it.

However, this is only the starting point. Elliott knew that to put an order in such a mess like the free movement of a financial market, he needed to keep things simple.

The Elliott Wave Theory as we know it today is anything but simple. But, above all, it is a logical process. This was the original aim.

At the end of his work, Elliott was convinced he was right. So is any elliottwavetrader today.

With his final book, “Nature’s Law – The Secret of the Universe”, Elliot presented the world the most comprehensive way to approach financial markets. The Elliott Wave Theory applies to any freely traded asset, financial product, or commodity.

Hence, it applies to the current Forex market too.

The Secret of a Wave Pattern

As mentioned earlier, Elliott tried to keep things simple. Of course, as much as possible.

One of his brilliant ideas was that cycles come and go in various degrees. Imagine that this was back in 1930’s.

While that wasn’t obvious back then, it is clear as the light of day today. Just look at how different time frames appear on all trading platforms.

Those time frames are, in fact, cycles of different degrees.

As such, a cycle is part of one of a bigger degree. And so on.

To make this clear, cycles needed to be identified. But how to differentiate between a five-wave structure and a three-wave one?

Brilliantly, he used the terms impulsive and corrective waves. Therefore, a five-wave structure is an impulsive wave. And, a three-wave one, a corrective wave.

So, a cycle was split into two parts. An impulsive and a corrective one.

While the image below shows a bullish cycle, the same is valid for a bearish one.

Counting Waves – the Elliottwavetrader’s Nightmare

Now that a cycle was split into two parts, the difficult job begins. Elliott further divided his task.

He figured impulsive and corrective waves should be labeled. Differently, so that any elliottwave trader knows where the count is.

As such, for impulsive waves, he used numbers: 1-2-3-4-5. And, for corrective waves, letters: a-b-c.

Just like that, a cycle part of the Elliott Wave Theory looks like 1-2-3-4-5-a-b-c.

So far, so good. Because of this simple adding, the Elliott Wave Theory looks easy to understand.

Yet, this is exactly why so many traders fail at it. Remember the different cycles of different degrees mentioned earlier?

As such, every one of the eight segments from the image above contains waves of a lower degree. Every one of them!

Elliott laid down clear rules. Both for impulsive and corrective waves.

His approach to market was methodical. Therefore, every impulsive move must respect the rules of an impulsive move.

If one, no matter the degree, won’t respect the rules, the whole cycle gets invalidated.

A cycle of a lower degree appears above. Imagine that the 3rd wave what follows is a five-wave structure too. And so on.

These small details make an Elliott Wave forecast very difficult. Because most traders fail to put everything together.

Impulsive Waves Part of an Elliott Wave Forecast

Elliott claimed that there were waves within waves. And, waves have a clear order, according to their degree.

An impulsive wave is a five-wave entity. A move that has no more, no less, than five swings.

The wave trader knows the 2nd and the 4th waves show corrective activity. The only waves that show impulsive activity are the 1st, the 3rd, and the 5th one.

As such, any impulsive wave has three impulsive waves of a lower degree and two corrective ones. Therefore, the rules of an impulsive wave must consider corrective activity.

Elliott Wave Theory states that in an impulsive wave:

The 1st, 3rd and the 5th waves are impulsive.

The 2nd and the 4th waves show corrective activity.

No overlapping exists between the 2nd and the 4th

No parts of the 2nd wave move beyond the start of the impulsive wave.

The 3rd wave is never the shortest impulsive waves.

At least one impulsive wave must extend.

The 2nd wave cannot start with a triangle.

Any correction can appear as a fourth wave.

The 5th wave can show terminal activity.

The above are only some of the rules that make an impulsive wave. Elliott also covered complex concepts like:

How to find the 5th wave’s nature based on the 2-4 trend line’s angle.

How to use price and time in an impulsive wave for the perfect trade.

The above are little known to the public. Already in this article, there’s an explanation for that.

People focus only on the basic rules. While they are mandatory, they lack the forecasting power of a true Forex wave analysis.

How an Elliot Wave Trader Defines Extensions

At least one wave in an impulsive move extends. But, what’s an extension’s definition?

Elliott strongly believed in a universal order. It may or it may not appeal to everyone these days, but we cannot ignore the power of the Fibonacci numbers. Neither did Elliott.

For, you see, the Elliott Wave Theory wouldn’t exist if it weren’t for the Fibonacci ratios. Especially the golden ratio: 61.8%.

Everything surrounding this analytical concept relates to 61.8%. One way or the other, a count gets validated/invalidated because of it.

For one wave to extend, it needs to stand out of the crowd. It needs to be the longest of the impulsive waves of a lower degree.

Namely, when comparing the 1st, the 3rd, and the 5th waves, one is the longest. Not only that is bigger, but it must have more than 161.8% when compared with the next longest one.

It may sound tricky, but it’s a wonderful rule. As such, the theory further divides between impulsive and corrective waves.

For, even if the extended wave is so long, it still must respect all the rules of an impulsive wave.

If an impulsive wave extends, it is said that the “litmus test” succeeded. In fact, the 161.8% represents the minimum condition for such a test. And, the market may have two extended waves part of the same impulsive move.

The most common wave to extend is the 3rd wave. Such extension appears most of the times.

As Forex swing traders that use the Elliott Wave Theory here on Capital Properties FX, this is the impulsive wave we face the most. Therefore, the rules of it make the difference between a losing and a winning trade.

Our Elliott Wave Forex signals depend on how we treat all the rules in this article. This one included.

In a 3rd wave extension, the 3rd wave explodes. It moves beyond 161.8% of the 1st wave’s length. Most of the time, this is the case.

However, Elliott states that the 161.8% distance is the minimum one the price travels. It can go much more than that. 261.8% or more comes often.

Because the 3rd wave is the longest, the other waves must adapt. As such, the 2nd wave is either small and insignificant. Or forms a running correction.

More about running corrections later in this article. The 2nd wave in such an impulsive usually takes more time than the 4th wave.

Moreover, the 4th wave rarely is a complex correction. And, the 5th relates to the 1st wave both in price and time.

As a rule of thumb, they are never equal! If this happens, the market prepares for a major top or bottom.

But more importantly, we use the time element for an Elliott Wave forecast. For when you put the time together with price, the results are fabulous.

Conclusion

While it is presented as a simple concept, the Elliott Wave Theory is complex. So complex that it requires a lot of time and dedication.

But, with hard work comes to the results. Any wave pattern presented here is just that: a wave pattern. There are so many of them part of this theory that this article would have been too long.

What matters is that the most important parts were covered. But the logical process, the one that stands behind Elliott Wave power, is more complex.

Small details and tips and tricks are the norm.

While the rules are not broken, they get to “bend” from time to time. Yet, the theory outlives its times.

Almost a century ago, one person sat down and laid all these rules. One single person.

To put the Elliott Wave Theory into perspective, here on Capital Properties FX we predicted the outcome of the most important events in 2016: Brexit and the U.S. Presidential election.

Because this is what Elliott Wave does. It allows you to corner a market.

It all starts with a simple question: is a move corrective or impulsive? Then, the answer to this question leads to another one, and another one, and so on…until there’s no more option for the price action.

From time to time, the Elliott Wave Theory allows for a market to be cornered. When this happens, the outcome blows anyone’s mind.

Moreover, Elliott Wave traders should favor some wave patterns more than the other. That’s specifically true when the analysis integrates the time element.

Price and time – the holy grail in trading. Come and master the Elliott Wave Theory to corner the Forex market. Ask for a quote here.